The draft guidelines on how foreign banks can convert themselves into wholly owned subsidiaries of their parents, have been delayed, with the Reserve Bank of India (RBI) awaiting clarity from tax authorities. The guidelines were to be have been released by September but since foreign banks are looking for a one-time waiver in stamp duty fees to incorporate in India, the matter has been referred to the CBDT. A senior official from the Indian Banks Association said, “Foreign banks wanting to convert into a wholly owned subsidiary would also see a notional transfer of assets. This transfer would attract stamp duty and foreign banks have sought a relaxation.”

“In 2005, stock exchanges were granted a waiver of stamp duty fees which paved the way for the demutualisation and corporatisation process. Their corporatisation also involved a notional transfer of assets which did not attract any stamp duty,” he added. At present, all foreign banks in the country operate as branches of their parents. The central bank in 2005 had permitted foreign banks to adopt the subsidiary route.

However, none of the foreign banks have been willing to operate as a subsidiary since they don’t see any advantages in doing so. Hence, the central bank, in consultation with the government, began working on fresh guidelines that will encourage foreign banks to operate as wholly owned subsidiaries.

Globally, central banks are studying the pros and cons of encouraging foreign banks to incorporate locally to enable the regulators have better control over these entities and ringfence risks. The need for greater control has increased after the global financial crisis. “The RBI will not make it mandatory for foreign banks to operate as wholly owned subsidiaries but would encourage them by giving them some sops,” a source said. The central bank is expected to be more liberal with branch licences for foreign banks in under-banked centres. However, there is unlikely to be any relief relating to priority sector requirements.

“Like domestic banks, foreign banks would have to ensure that 40% credit is directed to the priority sector (agriculture and small businesses),” added the source. Currently, for foreign banks, this number is pegged at 32%. Export loans are part of priority sector loans for foreign banks.

The CEO of a foreign bank said, “We also have feedback that the Reserve Bank of India would encourage foreign banks to operate as wholly owned subsidiaries and that there would be no relaxation in priority sector guidelines.”

“We are happy to open branches in underbanked areas as some of these centres can be deposit centres and emerge as good small and medium enterprises business centres,” he added.

At present, under World Trade Organization (WTO) norms, RBI is committed to 12 new branch licences to foreign banks every year. Although the number of licences given out has been way higher than this, foreign banks are not happy as RBI is more liberal with domestic banks when it comes to branch expansion.

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